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Company comes first: Court

In a precedent setting judgment, the Supreme Court of Canada has written that boards of directors who oversee a company have a primary duty to do what is best for the corporation, not necessarily its shareholders or bondholders.

A Bell Canada Enterprises (BCE) device is shown outside the Supreme Court of Canada in Ottawa June 17, 2008. (TOM HANSON / THE CANADIAN PRESS)

By Julian BeltrameTHE CANADIAN PRESS

Fri., Dec. 19, 2008

OTTAWA–In a precedent setting judgment, the Supreme Court of Canada has written that boards of directors who oversee a company have a primary duty to do what is best for the corporation, not necessarily its shareholders or bondholders.

And the court ruled against the idea that shareholders hold a greater stake in a company than investors who have bought bonds.

"Directors may find themselves in a situation where it is impossible to please all stakeholders," the court says in its written ruling of a Supreme Court decision earlier this year that allowed the planned privatization of BCE Inc., owner of Bell Canada, to go ahead.

The written ruling was released Friday, about a week after the $52 billion deal collapsed because of volatile credit markets and the impact of the North American recession.

"In each case, the question is whether, in all the circumstances, the directors acted in the best interests of the corporation, having regard to all relevant considerations, including, but not confined to, the need to treat affected shareholders in a fair manner," the court wrote.

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The clarification of corporate law by Canada's top court in Friday's written findings go beyond the doomed buyout of BCE (TSX: BCE) by a group of investors headed by the Ontario Teachers' Pension Plan.

The ruling will likely be used to clarify the relationship between corporate executives, shareholders and bondholders in future mergers, bankruptcies or hostile takeovers, where the interests of various stakeholders collide.

In June, the Supreme Court had given the go ahead to the "plan of arrangement" – dismissing a challenge from bondholders that their interests had not been protected – but because of the time constraints issued no reasons for the decision.

The bondholders had tried to block the deal, arguing that the massive debt BCE was taking on to finance the privatization would cripple the company and lower the value of its bonds – and their investments.

The ruling appeared to clear the last hurdle to the $52 billion acquisition – at the time the world's largest leveraged buyout – but the controversial arrangement collapsed as the global financial meltdown and the poorer economic prospects made the deal less valuable and harder to finance.e

The deal was troubled from the beginning.

The $42.75-a-share price tag – considered far too rich by many amid the unfolding global financial crisis and economic slowdown – saddled the company with a massive $34 billion debt.

Bondholders were incensed, claiming the debt burden reduced their holdings to junk bond status and cost them $1 billion, and sued.

They argued that a 2004 Supreme Court precedent meant the BCE directors had a fiduciary duty to consider the interests of all stakeholders, not just shareholders, in the transaction. They won in the Quebec appeals court, but lost at the Supreme Court.

As well, the acquisition had raised concerns with the federal communications regulator over the legality of the pension fund becoming majority stakeholder in BCE, but there too eventually received a green light when the Financial Services Commission of Ontario, which regulates pensions in the province, said it could go ahead.

The good luck ended as the transaction was to be finalized earlier this month, and it was the size of the debt that finally proved a bridge too far.

Accountants KPMG LLP questioned whether the company would be solvent in light of the large debt it was required to take on. BCE is now suing the purchasers in an attempt to recover $1.2 billion in break-up fees.

After the deal's collapse, BCE announced it would buy back shares in a bid to boost the stock price and reinstate the dividend, which the company had cut earlier this year to conserve cash as it prepared for the buyout.

In Friday trading on the TSX, BCE shares fell 12.5 cents to $18.39.

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